3 Development of the Market Obstacles 2 Sound Banking System Blue-chip firms access to low cost bank debt, which compares favorably from an all-in cost standpoint versus capital market alternatives Maturity Issuers tendency to seek access to offshore debt markets as the maturity of domestic debt instruments are rather short Sovereign public financing needs Crowding-out effect due to public sector s high funding needs historically Saving patterns of retail investors 70% of retail savings are bank deposits, 90% of which have terms of 3 months or shorter Institutional Investor Demand Low appetite of institutional investors towards corporate debt products as they have been largely investing to government debt instruments for decades Declining public debt ratios, stabilizing interest rates at single digits and increasing investor demand for alternative fixed income products have created desirable conditions for the development of the corporate bond market.

4 Development of the Market Laws and Regulations 3 Amendments with Regards to Taxation Withholding taxes are reduced to%10, equivalent to that of government bonds. Withholding taxes are reduced to 0% for eurobond issues with maturities of 5 years or higher, BITT on repo transactions and capital gains are reduced to 1%, Withholding taxes on interest income due by corporate investors and investment funds are reduced to 0%. Setting up a Regulatory Framework for Alternative Instruments İTMK Communiqué (Seri: III, No: 33) KFF ve İDMK Tebliğ (Seri: III, No: 34) Communiqué on Asset backed Securities (Seri: III, No: 35) Communiqué on Principles regarding registration sale of debt securities (Serial:II, No:23) VTMK Communiqué Lease Certificates (Seri: III, No: 38) (Serial: III, No: 43) Simplifying the Regulatory Framework Combining various communiqués for debt instruments under single ruling (Seri: II, No: 22). Issue limits are referenced to issuer equities, setting the limit at 10x equity for public, 6x equity for private companies Amendments to Lower Issuance Costs 50% taxes on CMB and ISE registration fees are eliminated. CMB registration and CRA fees are reduced in proportion to the maturity of the issues. Corporate bond issues are eligible for repos. Following the new rules and regulations, issuance expenses (i.e. registration and other regulatory fees) have come down to c.25 bps (0.25%) for a two year bond issue.

5 Development of the Market Issuer SWOT Analysis 4 Alternative to existing funding channels Unsecured option without any collateral Provides funding flexibility Promotes corporate awareness and institutional image Motivates for higher operational efficiency as the company performance is continuously monitored by investors Preparation of the CMB application For public issues, mandatory disclosure of cost of funds to the public Public disclosure requirements for the term of the issue Mandatory reserve requirements for bank issuers independent of the maturity of the debt issued Strengths Weaknesses Opportunities Threats Central Bank policy rates are at historically low levels Low fixed costs Regulatory issuance limits of 10x equity for public, 6x equity for private companies Restructuring opportunity for higher cost short term debt profile Access to a broader investor audience by using alternative products such as convertibles. Not possible to issue FX denom. debt domestically Average maturities shorter than that of government bonds Risk averse investor base

6 Development of the Market - Investor SWOT Analysis 5 Yield pickup opportunity in the current low interest rate environment Withholding tax advantages for corporate investors and investment funds Eligibility of corporate bond in repo and reverse repo transactions Capital gain potential in addition to coupon income for total return oriented investors Inadequate liquidity compared to government bonds Issuer credit risks Limited blue-chip issuers, given their access to much cheaper bank debt 5% BITT for those investors subject to the BITT Strengths Weaknesses Opportunities Threats Higher return potential by investing in longer maturity issues Increasing the return potential by investing in longer term maturities Opportunities in collateralized products Bank issuers dominating the market and limiting the potential for corporate issuers Pricing risks due to inadequate assessment of true credit risks

14 Opportunities and Suggestions Medium Term Opportunities Supply Side Opportunities Demand Side Opportunities 13 More room for corporate bond issues as government has improved its debt profile and extended the maturity of its existing debt Issue costs are more feasible for issuers Banking sector needs long term funding sources to better match the duration of its assets with that of its liabilities Non-financial corporates seeking to diversify its funding sources after the global financial crisis. Opportunities might arise in sectors such as utility, energy, and transportation which have been currently going through a major privatization and investment phase and typically take a large share of corporate bond issues in developed markets Investors switching large amount of FX deposits they have been historically holding to TRY instruments given the TRYUSD stability and low yields of FX deposits at the current environment Growing asset sizes of the pension funds, mutual funds, insurance companies and other institutional investors, which are more likely to invest in corporate bonds Competition among institutional investors Özel yatırım fonları arasındaki performans rekabetinin fon yöneticilerini ek getiri sunan ürünlere yöneltmesi Increasing appetite of global investors towards local currency fixed income products and global fund flows into local currency specialized funds Increasing foreign investor demand for TRY assets, in case Turkey s sovereign rating is upgraded to investment grade On the supply side, more feasible issuance costs along with non-financial sector s efforts to diversify their funding source and on the demand side, increasing focus towards higher yielding products have been driving further growth in corporate bond issuance.

15 Opportunities and Suggestions Factors for Further Development 14 Continuing stability in macroeconomic indicators Increasing penetration of professionally managed investment funds in managing savings Adapting to a credit culture among investors Establishing a transparent and reliable credit rating standards that would enable to differentiate the credit quality of issuers Increasing number of publicly trading companies and more companies demonstrating transparency required by credit investors More diverse issuer sector profile Providing a variety of products with different characteristics and maturities to suit the needs of investors with different risk appetites Encouraging the participation of foreign investors Eliminating the 5% BITT currently applied on coupon income and capital gains for financial institution investors Rearranging the reserve requirements of bonds issued by banks by incentivizing long term issues Simplifying the ISE listing application process As long as macroeconomic indicators remain stable and institutional investor assets continue to grow, we expect the corporate bond market to accelerate its growth with total new issues reaching to TRY 11 billion in 2011.

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